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Unionization, Information Asymmetry and the De-location of Firms

Author

Listed:
  • Marco de Pinto

    () (Institute for Labour Law and Industrial Relations in the EU, University of Trier)

  • Jörg Lingens

    () (University of Muenster)

Abstract

We analyze the effects of unionization on the decision of a firm to either produce at home or abroad. We consider a model in which home and foreign workers are perfect substitutes and firms have an informational advantage concerning their productivity. The union offers wage-employment contracts to induce truthtelling. Because of a firm's productivity dependent outside option (producing abroad), the problem is characterized by countervailing incentives. We find that, under fairly mild assumptions on the distribution of firm's productivity, the overstating incentive always dominates. The equilibrium contract offered by the union is then characterized by overemployment. Besides its effect on the intensive margin, the union also affects the extensive margin (i.e. de-location). The union forces firms to de-locate because this narrows the possibility to overstate productivity which then saves rent payments to the firm.

Suggested Citation

  • Marco de Pinto & Jörg Lingens, 2014. "Unionization, Information Asymmetry and the De-location of Firms," IAAEU Discussion Papers 201412, Institute of Labour Law and Industrial Relations in the European Union (IAAEU).
  • Handle: RePEc:iaa:dpaper:201412
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    References listed on IDEAS

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    More about this item

    Keywords

    trade unions; information asymmetry; open economy; countervailing incentives; de-location;

    JEL classification:

    • J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects
    • F2 - International Economics - - International Factor Movements and International Business
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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